Despite the minor volatility over the last week the broader market is not showing any material weakness. The big cap tech stocks on the Nasdaq and the biotech sector had the biggest losses and the semiconductor stocks had one bad day. Otherwise, I only saw minor selling in the broader market. As is normally the case, the stocks with the biggest gains over the last month, generally had the biggest losses.

Here is the problem. Although the broader indexes are not showing any significant damage, the oscillators have rolled over. In theory, the next support break could be ugly but the keyword there is "break."

On the Russell 3000, the largest 3,000 stocks in the market, the index closed at 1,303 and critical support is 1,295. I believe that support will hold as long as we do not have an external market event like a Brexit type vote in Italy on Sunday. Otherwise there is nothing on the calendar that has market moving potential until the Fed announcement the following Wednesday.

The Vanguard Total Market Index (VTI) is showing an identical pattern with support at 112.75 and the close at 113.31. This index moves slow because of the breadth and the small dollar amounts but it is at a critical level.

The NYSE Composite Index of all 1900+ stocks traded on the NYSE, does not even look like it is related to the rest of the market. It is well below the prior 2015 high of 11,254 and has not reacted as violently to the post election euphoria. I do not have an answer to this except that 400 of the stocks are not USA companies and there is a very broad range in the size of the companies represented. I would not be watching this index for market direction.

I would watch the Nasdaq 100 Index. The $NDX has failed to make a new high and has almost completely erased the post election gains. The big cap tech stocks remain weak and a break below support at 4,680 would be a disaster. That would signal a major change in sentiment for the broader market. While I do not expect that to happen, we have to be aware of the possibility and be prepared to take action if it happens.

The Semiconductor Index ($SOX) fell nearly 7% in only three days. This was a major factor in the Nasdaq crash on Thursday. The rebound was decent but not convincing. Support is well below in the 800 range, which would erase all the post election gains.

The $SOX leads the Nasdaq. It has been called the "head of the snake" because the Nasdaq always follows, up or down. We need the $SOX to recover if the Nasdaq is going to shed its bearish outlook.

Note the perfect correlation over the last month between the SOX and Nasdaq.

The biotech sector is also crashing and that is a major sector on the Nasdaq. The index has fallen -9% from the post election high at 3,454. There is no specific reason for the sector to be crashing. There have been several companies with drug trial failures but there are over 100 companies with trials in progress. The Valeant cloud could be impacting the sector along with those failed trials. If the sector continues to decline it is a long way before support at 2,800.

With only two sub sectors causing the most trouble and the Nasdaq the weakest link because of those problems, we need to watch the Nasdaq for market direction. Eventually those stocks will reach a point where value investors will begin to think they are attractive. Hopefully, that will happen soon.

I do not believe the broader market is sick. The broader market is suffering from a light case of profit taking and it should end soon.

Enter passively and exit aggressively!

Jim Brown

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